Congress’ top bank critics are planning a new inquiry into financial regulators’ willingness and ability to enforce the laws that Congress passed to prevent Wall Street from blowing up and threatening the economy again.
Sen. Sherrod Brown, the populist Ohio Democrat, is planning a hearing to look into the latest financial controversy, namely secretly recorded tapes that bank critics fear revealed a culture of deference and timidity at the Federal Reserve Bank of New York.
With the outspoken Wall Street opponent Sen. Elizabeth Warren of Massachusetts, Brown has called for an oversight investigation into the revelations included in the recordings, which were made by former New York Fed examiner Carmen Segarra in 2012 and published by ProPublica and National Public Radio in September.
Now, according to Reuters, Brown plans to hold a hearing related to the tapes. Brown, who did not respond to a request for comment, has the power to hold hearings as chairman of the Senate Banking subcommittee on Financial Institutions and Consumer Protection.
Brown and Warren, among others, reacted strongly to the tapes because they appear to feature members of the New York Fed worrying about upsetting Goldman Sachs in questioning a potentially problematic deal, as well as pressuring Segarra to change a negative conclusion about Goldman Sachs’ conflict of interest policies.
The New York Fed has denied that the tapes show any wrongdoing on its part, as has Goldman Sachs, which declined to comment for this article.
To critics, the tapes demand further investigation not because they necessarily reveal any financial malfeasance, but because they might expose a long-running acquiescence to banks by regulators.
In an interview with NPR, Warren said in early October that the tapes demonstrated “exactly what we already knew — that the relationship between regulators and the financial institutions they oversee is too cozy to provide the kind of tough oversight that’s really needed.”
Warren added, “We can keep making the rules tougher and tougher, but it won’t make an ounce of difference if the regulators won’t enforce the rules that are there.”
That is a view shared by some outside experts.
The problem isn’t necessarily the law. The 2010 Dodd-Frank financial reform law “fundamentally gave the regulators plenty of authority” to prevent crises and taxpayer bailouts, even if some parts of the measure were flawed, said Anat Admati, an economist at the Stanford Graduate School of Business and an expert on financial regulation.
But Admati warned that bailouts might occur if the law isn’t enforced properly, a problem that has spanned decades.
“The S&Ls were a big failure to intervene in a very harmful situation that turned out to be much more expensive to deal with later and exposed taxpayers to large costs,”said Admati, referring to the savings and loans crisis of the 1980s and 1990s that saw thousands of savings and loans fail. “We saw it again in the recent crisis and unfortunately we might again,” she added.
Marcus Stanley, the policy director of Americans for Financial Reform, said hearings on the New York Fed recordings could be an opportunity to examine the longer-running problems surrounding enforcement of regulations.
“I don’t think these hearings should be a witch hunt around these particular transactions,” Stanley said. “I think they should aim to answer whether this supervision process has been reformed from the problems they had before the crisis.”
Stanley referred to a 2009 report by Columbia University finance professor David Beim ordered by New York Fed President William Dudley that found that the Fed’s examiners were deferential toward the banks. Dudley tried to act on that finding, partly by hiring aggressive examiners like Segarra.
A representative for the New York Fed said the bank was aware that Brown intends to call a hearing, but declined to say whether any Fed employees had been contacted to serve as witnesses.
For his part, Dudley in October warned of cultural problems — in banks. Addressing a meeting of big bank executives in New York City, Dudley said there was a culture of “bad behavior” at banks, and that if it weren’t changed, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” necessitating that the banks be broken up.
“It is up to you to address this cultural and ethical challenge,” Dudley concluded.
